Return on capital employed

% Return on capital employed is calculated as:

Net profit before tax and dividend / Capital employed x 100

Years 2009 2010 2011

Net profit before tax and 0.73 0.87 0.78
dividend
Capital employed 2.71 3.12 3.47

ROCE 26.9% 27.9% 22.5%

Asset turnover ratio

Asset turnover is calculated as:

Turnover / Capital employed (total assets)

Years 2009 2010 2011

Turnover 4.90 5.30 6.60

Capital employed 2.71 3.12 3.47

Asset turnover 1.81 1.70 1.90

times times times

Net profit margin

Net profit before tax and dividend / turnover x 100

Years 2009 2010 2011

Net profit before tax and 0.73 0.87 0.78

dividend

Turnover 4.90 5.30 6.60

Net profit margin 14.9% 16.4% 11.8%

Current ratio

This is calculated as:

Current assets / current liabilities

Years 2009 2010 2011

Current assets 1.66 1.91 2.49

Current liabilities 1.35 1.56 1.90

Current ratio 1.23 : 1 1.22 : 1 1.31 : 1

Acid test ratio

This is calculated as:

Current assets - stock / current liabilities

Years 2009 2010 2011

Current assets - stock 1.17 1.36 1.89

Current liabilities 1.35 1.56 1.90

0.87 : 1 0.87 : 1 0.99 : 1

Debtors collection period

Debtors collection period is calculated as:

Debtors / turnover (sales) x 365

 Years 2009 2010 2011

Debtors 1.14 x 365 1.32 x 365 1.84 x

365

Turnover 4.90 5.30 6.60

Debtors collection period 85 days 91 days 102 days

Gearing ratio

Gearing ratio is calculated as:

Loan capital / total capital employed x 100

Years 2009 2010 2011

Loan capital 2.21 x 2.21 x 2.21 x

100 100 100

Total capital employed 2.71 3.12 3.47

Gearing ratio 81.5% 70.8% 63.7%

Labour cost as % of sales

2009 2010 2011

Labour costs 0.93 0.98 1.25

x100 x100 x100

Turnover 4.90 5.30 6.60

Labour cost as % of sales 18.9% 18.5% 18.9%

Operating costs as % of sales

Years 2009 2010 2011

Operating costs 4.17 x100 4.43 5.82 x100

x100

Turnover 4.90 5.30 6.60

Operating costs as % of 85.1% 83.6% 88.2%

sales

Distribution costs as % of sales

Years 2009 2010 2011

Distribution costs 0.44 0.49 0.61 x100

x100 x100

Turnover 4.90 5.30 6.60

Distribution costs as % of 8.98% 9.24% 9.24%

sales

Administrative costs as % of sales

Years 2009 2010 2011

Administrative costs 0.19 0.22 0.27 x100

x100 x100

Turnover 4.90 5.30 6.60

Administrative costs as % of 3.87% 4.15% 4.09%

sales
Summary of ratios

Ratio 2009 2010 2011 Industry See

Average Notes
% Return on capital 26.9 27.9 22.5 26% 1
employed
Asset turnover (times) 1.81 1.70 1.90 1.79 2
times
Net profit margin (%) 14.9 16.4 11.8 14.5% 3
Current ratio 1.23:1 1.22:1 1.3:1 1.5:1 4
Acid test ratio 0.87:1 0.87:1 0.99:1 1.03:1 5
Debtors collection period 85 91 102 83 days 6
(days)
Gearing ratio (%) 81.5% 70.8% 63.7% 32% 7
Labour costs as % of sales 18.9 18.5 18.9 18.1% 8
Operating costs as % of sales 85.1 83.6 88.2 85.5% 9
Distribution costs as % of 8.98 9.24 9.24 9.5% 10
sales
Administration costs as % of 3.87 4.15 4.09 4.5% 11
sales

Answers - question 2

1. Return on capital employed

Though it stayed just above the industry average for the first two years, there has been a
significant decline in 2011 to a level below that of the industrial sector average for that year.
The fall is quite significant and needs some careful investigation. Has the firm lost out in
terms of competitiveness? Has their turnover grown slower than their competitors? There is
some evidence that the problem may be cost control with their operating costs as a % of
sales increasing significantly in 2011. Something to investigate further!

2. Asset turnover

The company is generating more turnover in relation to their assets than its competitors. The
figure did fall below the industry average in 2010, but they appear to have corrected this.
The implication of this is that they are working their existing assets harder to generate more
sales. Profitability of these sales has not improved but that is a different issue.
3. Net profit margin

The reduction in overall performance is highlighted here in the reduction of the net profit
margin. This is a worry and the firm needs to look carefully at their cost control and see why
their net profit has fallen so sharply.

4 & 5. Current ratio & Acid test ratio

The current and acid test ratios are measures of the liquidity position of the firm and are
always best looked at together. The current ratio includes ALL current assets, but the acid
test ratio looks at current assets without stock as this is considered to be hard to sell quickly.
A firm may therefore have a healthy current ratio as they have plentiful current assets, but a
poor acid test ratio as a high proportion of their current assets are held as stock. The figures
for this firm indicate a fairly sound level of liquidity, though are marginally below the desired
level and a little below the industry average. However, liquidity is strengthened in 2011 and
this could indicate improved stock control or improved credit control. However, the latter is
unlikely as the debtor collection period has increased significantly.

6. Debtors collection period

The figure for the debtor collection period is higher than the industry average and rising
significantly. Credit controls need to be tightened. The key options here are to put more rigid
controls in place to collect debts and/or to pay bills a little later (though this can cause
problems in relationships with suppliers). If the firm does not sort out these problems then
they could start to face working capital shortages.

7. Gearing ratio

The gearing ratio for the firm is well above the industry average, though it has been falling
year by year as the loan capital has stayed the same and capital employed has grown with
higher retained profit being added to the capital each year. The gearing ratio for the industry
is fairly low, but the higher gearing ratio for Stortford Yachts may expose them to external
influences. Any change in interest rates will lead to higher interest payments and may reduce
their profitability.

8. Labour costs as a % of sales

Labour costs as a percentage of sales have been held fairly steady over the period indicating
reasonable control over labour costs. However, the figure is slightly above the industry norm
for period.

9. Operating costs as a % of sales

There has been a significant increase in the relationship of operating costs to sales, which
indicates that operating overheads and some other direct costs require tighter controls. This
needs careful looking at by the firm as it is likely to be the principal cause of the poor profit
performance indicated by the fall in the ROCE and net profit margin.

10 &11. Distribution and administrative costs as a % of sales

These figures appear to compare favourably with the industry as a whole. This indicates
reasonable control over these costs, so the firm needs to look elsewhere for their overhead
cost control problems (as mentioned above).